A little relief…

The first quarter of 2023 proved to be a positive start for the market, with the major benchmarks posting welcome returns after a tumultuous 2022. The S&P 500^® Index surged 7.5%, the Russell 2000^®  Index rose 2.7%, and the Bloomberg U.S. Aggregate Bond Index closed the quarter up 3.0%.

This encouraging performance is a marked improvement from last year's results, where both the stock and bond markets experienced negative returns.

Putting this quarter's results in context with historical data, it was not surprising to see the market rebounding after a challenging year. From 1950 to 2022, the S&P 500^® had 16 negative annual returns, representing approximately 22% of the overall period. In the following year, the index bounced back 80% of the time with a positive annual return which averaged 27.4%.

The markets proved resilient during the quarter, even in light of the Federal Reserve continuing its efforts to control inflation by implementing two consecutive 25 basis point (0.25%) rate hikes in February and March. These actions marked the eighth and ninth consecutive rate increases, dating back to March 2022, bringing the Fed Funds rate to 4.75% - 5.00%. 

Where is inflation?

The year-over-year inflation measured by the Consumer Price Index (CPI) has dropped slightly to 5.0% but remains high, with food and shelter inflation proving to be stubbornly persistent.  It is evident that inflation is currently the top concern for the Federal Reserve, U.S. businesses, consumers, and investors.

What does history suggest for investors coming out of periods of high inflation?

We analyzed market performance following the ten largest year-over-year increases in inflation as measured by the Consumer Price Index.  The following chart shows that the average market returns were remarkably high over the subsequent five years.  Most people would be surprised to learn that historically inflation has not led to a significant decline in market performance.

This data can remind investors that although inflation can be concerning, it's not the only factor affecting market performance. With a well-diversified portfolio and a long-term perspective, investors can weather periods of inflation and still achieve their financial goals.

 Inflation and Market Performance: 10 Largest CPI Increases and Average Market Returns Over Subsequent 5-Year Periods

 Source : Connors Investor Services, Inc.  Consumer Price Index Data from the Bureau of Labor Statistics.  Historical performance of large capitalization stocks in the U.S. capital markets from 1926 to 2022 was obtained from 'U.S. Capital Market Performance by Asset Class 1926-2022' by Kroll.

The current inflation rate may feel exceptionally unusual due to the suddenness of price increases, particularly given that the average annual U.S. inflation rate has been only 2.47% over the past two decades, from 2000 to 2020.  However, as evidenced above, historically, there have been many periods in which inflation was higher than the recent annual rate of 5.0%. 

Although each period in history is characterized by its unique challenges and opportunities, reflecting on historical results and past economic cycles can serve as a powerful reference for long-term investors. Such reflection can inspire patience and provide insights into how to navigate the market's ups and downs.

As the economic landscape evolves, the Fed must navigate a complex set of challenges to ensure the economy’s stability.  In March, the collapse of Silicon Valley Bank, the 16th largest bank in the U.S., sparked concerns about a potential banking crisis, tighter lending standards, and the depth of an impending recession. The Fed is faced with the challenge of balancing its goal of reducing inflation while avoiding causing additional stress to the banking system or overshooting the effects of its rate increases.  This is one example demonstrating the importance of the Fed's role in managing inflation and mitigating risks to the banking system.  In addition, the upcoming first-quarter earnings season may bring continued market volatility in the near term, and there is a possibility of further economic softening.

We hold the belief that the historic reversal of monetary and fiscal stimulus will continue to weigh on markets and corporate profits. Although the likelihood, depth, and timing of a recession is a topic of debate, we are keeping a close eye on any potential risks and looking to be nimble in order to take advantage of any short-term overreaction opportunities. We also remain vigilant in monitoring your holdings for any company-specific challenges that would warrant adjustment.

As your fiduciaries, our priority remains to emphasize higher-quality factors such as stable earnings and reasonable valuations when selecting stocks for inclusion in your portfolio. In addition, we are committed to maintaining a diverse asset mix that may include stocks, bonds, and cash investments, ensuring that they are appropriately allocated based on your investment goals, time horizon, and risk tolerance. We believe that this approach has proven best to help you navigate through periods of market volatility and achieve your long-term investment objectives.

Enjoy the beauty of spring, and remember that we are always here for you.  Please do not hesitate to reach out to us at any time.

 Sincerely,

Peter J. Connors, CFA

President

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Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Connors Investor Services, Inc. “Connors”), or any non-investment related content made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from Connors.  Please remember to contact Connors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.  Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Connors is neither a law firm, nor a certified public accounting firm, and no portion of the commentary content should be construed as legal or accounting advice. A copy of the Connors’ current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request. Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results.  It should not be assumed that your Connors account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your Connors accounts; and, (3) a description of each comparative benchmark/index is available upon request.